When developing a price action trading strategy, one of the most important things you’ll need to do is decide which exit signals you will use. Ask yourself, “how will I know when it’s the right time to jump ship?” Price action trading, inevitably, becomes a careful balancing act between the pursuit of greater returns and the avoidance of greater risks.
While exiting a position too soon can cause price action traders to miss out on easy profits, holding a position for too long can also cause your already-earned profits to be eliminated (or cause your losses to become even worse). With the primary forces of trading psychology—fear and greed—always in play, knowing when to exit a position can be rather challenging.
The best way to avoid the hazards of greed and fear is to identify the exit signals you plan to use before you even begin trading. The exit signals that are most compatible with your trading strategy will depend on your personal goals, risk tolerance, and trade setting. But, in general, it is a good idea to say to yourself “if these conditions happen to emerge, then I am going to exit the corresponding position.”
In this article, we will discuss 8 exit signals that every price action trader needs to know. By taking the time to consider which signals are compatible with your approach to trading, you can set yourself up to lock in your winnings and avoid future losses.
1. MACD Crossovers
The Moving Average Convergence Divergence (MACD) indicator is one of the most useful indicators for price action traders. The MACD plots moving averages occurring in two different periods (such as 9 days and 26 days). When the 26-day line and the 9-day line experience a crossover (the bottom line crossing over the top line), this indicates that the current trend is either gaining or losing momentum. If the 26-day average suddenly becomes higher than the 9-day average, for example, this indicates it may be time to exit your position.
2. Elliott Waves
Ralph Nelson Elliott presented a simple theory, suggesting that market prices will often exhibit “wave-like” patterns that can be predicted. Elliott Wave Theory, when combined with some rigorous technical analysis, can help traders identify when price trends are most likely to experience reversals. Using this theory, price action traders will enter into positions following a corrective wave and exit positions at the top of an impulse wave.
3. Fibonacci Ratios
Though using market geometry cannot guarantee that now is the ideal time to exit or enter a prospective position, familiarizing yourself with common geometric patterns can help make the broader market a bit easier to navigate. Fibonacci ratios are often used by geometric traders to determine which price movements are most likely to occur. Using the “Fibonacci Factor” can help traders recognize levels of resistance and support, which, in turn, can help them develop a deeper understanding of how the price of a given security is likely to behave. Applied over a broad range of securities over time, market geometry can help add some predictability in an otherwise chaotic market.
4. Candlestick Patterns
Candlestick trading charts are much more useful than simple price charts; rather than simply plotting price over time, these charts illustrate the high point, low point, open, and closing prices within a given period. Three of the best candlestick patterns to keep an eye out for when identifying opportunities for entry or exit include reversal candlesticks, hammer candlesticks, and flanked Doji’s. As you gain experience as a trader, you’ll see how certain candlestick patterns are strongly correlated with near-term breakouts and price swings, making it easier to trade with confidence.
5. Wedge Patterns
Once you have been able to recognize the general price action that is taking place, the next thing you’ll want to do is evaluate the relative movements of high points and low points. Are the low points getting higher while the high points remain relatively unchanged? If so, despite the fact this activity raises recent moving averages, it may indicate that there is a natural “price ceiling” and that a triangular wedge is beginning to form. When this is the case, a price drop becomes increasingly likely, meaning it may be time to sell. Wedge pattern trading theory can be applied in both bearish and bullish market conditions.
6. Bollinger Bands
Bollinger Bands are a type of channel indicator designed to contain roughly 95 percent (two standard deviations) of all price movements. Channel indicators are useful during volatile market conditions because they help quantify how volatile the market might be (wider bands indicate more volatility). As price nears the edge of the bands, a reversal to the simple moving average becomes more likely. This means that when the price is near the top of the (fluid) channel, it’s time to sell.
7. Andrews Pitchfork Breakouts
The Andrews Pitchfork is more of a drawing tool than an indicator, but nevertheless, it can be used to identify when price action is likely to experience a significant change. Developed by Dr. Alan H. Andrews, the pitchfork plots five lines (upper warning, upper median, lower median, lower warning, and median), using three recent turning points and creating an easy-to-identify price channel. The area between the median lines should contain most price movements and as price approaches the upper median line, price action traders may consider selling.
8. Weekends and Closing Bells
Stock trading, contrary to forex and other types of trading, is unique in the sense that the vast majority of activity takes place within a very limited window of time. Holding onto stocks when the markets are closed necessarily increases a trader’s exposure to uncertainty and risk. Because of this, many short-term-oriented market traders will exit their positions either at the end of the trading day or the end of the trading week. Though the “jumps” between periods will become mostly noise for traders with a longer-term strategy, these jumps can be significant for those trading on the margins.
Conclusion – 8 Price Action Exit Signals Every Trader Needs to Know
To become a successful price action trader, you will need to simultaneously be able to use helpful signals and also apply your own intuition. Current price and recent price movements are, undoubtedly, the most accurate predictors of future price. By taking the time to understand these relationships and react to these signals appropriately, you can exit your positions with much greater precision.